Within the Middle East, Turkey and Iran are two of the biggest consumers of gold. Due to this fact, Metals Focus monitors them closely on the ground, via its extensive network of contacts. These two countries’ economies have been facing significant problems for a while now. Long standing structural defects, high unemployment, elevated inflation and the continued weakness in both economies are the primary culprits behind this, says Charles de Meester, founding partner of Metals Focus.
Partly related to these economic headwinds, the two countries’ currencies have been under pressure. More recently, the tipping point has come as a result of the escalation of disputes with the US. This saw local gold prices soar to record highs.
Both Turkey and Iran have been suffering from a “Trump factor” for a while. Looking first at Iran, already from his campaign days, then candidate Donald Trump had strongly criticised the nuclear deal signed by the previous administration with Iran. From the beginning of the year, many Iranians had been expecting US’s withdrawal from the deal and investors were flocking to purchase dollars and gold coins before the expected fallout.
The signs were visible early on as well, as the Iranian rial depreciated from around IRR38,000/$ in August 2017 to IRR47,000 this January. Conditions have stayed volatile, and the rial slid to IRR60,000 after the Nowruz holiday in April, when government unified the dual exchange rate system in the country, banning the operations of exchange offices. This was not effective and the public saw the government’s defence of the currency as a weakness. On 8th May, Donald Trump finally announced his country’s withdrawal from the Iran nuclear deal. Following that move, the rial fell to all-time lows of over IRR119,000 (basis the “street” rate) by the end of July, now trading at IRR105,000.
This has had mixed results on local gold demand. First quarter retail investment demand more than tripled y/y, while jewellery offtake (which carries a 9%VAT burden on finished products’ full value) fell by 16%. The second quarter was similar, as retail investment demand posted a similar three-fold rise y/y and jewellery demand slumped by 35% y/y. Weakness in the jewellery market continues while demand for coins remains strong.
Turning to Turkey, we see that the twin deficits in the current account (CA) and the budget made the economy vulnerable to external shocks. After the Fed started to increase interest rates and reduce its balance sheet, this made emerging markets like Turkey less attractive to foreign investors. Turkey’s short term debt with one year maturity stands at $180 bn and it needs to find an additional $50 bn as a result of its CA deficit this year. In addition to this, after his June election win, President Erdoğan’s unorthodox economic views on interest rates and his growing influence over the Central Bank’s policy decisions unnerved Turkey’s foreign creditors. The row with Trump over an evangelical pastor who is under house arrest in Turkey, acted as a trigger in the worst slump in lira against the dollar since the January 2001 crisis.
Against this backdrop, lira gold prices, which were trading around TL143/g last August, gradually climbed to TL193/g by the end of July (a 35% increase), and then shot up to TL273/g on 13th August, a 46% rise in 2 weeks’ time. There was panic in the market and even such record high prices did not initially trigger any meaningful selling back, which would have been the case under normal market conditions. As a result, the discount in the market compared to London initially ranged from only $2-3/oz to $5-6/oz. Later on, as markets calmed somewhat, selling back emerged, resulting in the discount widening to a range of $10-15/oz to $15-20/oz. However, if and when the prices fall back to the low TL200’s or below, we believe that investors will start buying again. Looking further ahead, we believe that the weakness in the lira will persist and dollar gold prices will also rebound from their current levels. This in turn, suggests that disinvestment, as well as scrap, will grow this year, while jeweler demand is likely to post a double digit decrease, after last year’s marginal 1% rise.
Source: Charles De Meester writing in Precious Metals Weekly, a newsletter published by Metals Focus, www.metalsfocus.com, one of the world’s leading precious metals consultancies.